Tanzania Investment and Consultant Group Ltd

| Economic Research Centre

Trends and Implications of Interest Rate Changes in Tanzania
June 13, 2024  
Trends and Implications of Interest Rate Changes in Tanzania Overview Interest rates in Tanzania have shown notable changes over the period from April 2023 to April 2024. Both lending and deposit rates have exhibited varying trends, contributing to a narrowing interest rate spread, indicating a potential reduction in credit risk and borrowing costs. Lending Rates […]

Trends and Implications of Interest Rate Changes in Tanzania

Overview

Interest rates in Tanzania have shown notable changes over the period from April 2023 to April 2024. Both lending and deposit rates have exhibited varying trends, contributing to a narrowing interest rate spread, indicating a potential reduction in credit risk and borrowing costs.

Lending Rates

  1. Overall Lending Rate:
    • The average lending rate decreased slightly from 15.91% in April 2023 to 15.42% in April 2024.
    • There was a general downtrend in the lending rate, despite some fluctuations, with a peak of 16.02% in June 2023.
  2. Short-term Lending Rate (up to 1 year):
    • Started at 16.55% in April 2023 and decreased to 15.93% in April 2024.
    • The rate saw a peak of 17.10% in June 2023 before a steady decline.
  3. Negotiated Lending Rate:
    • Negotiated rates showed minimal fluctuations, staying around 14%, with a slight increase to 13.95% in April 2024 from 13.65% in April 2023.

Deposit Rates

  1. Savings Deposit Rate:
    • Increased from 1.60% in April 2023 to 2.79% in April 2024.
    • There was a noticeable jump from 1.69% in September 2023 to 2.60% in December 2023, followed by a gradual increase.
  2. Overall Time Deposit Rate:
    • Rose from 6.79% in April 2023 to 7.44% in April 2024.
    • The rate peaked at 7.45% in December 2023.
  3. 12-months Deposit Rate:
    • Increased from 7.70% in April 2023 to 8.21% in April 2024.
    • There was a significant rise to 8.98% in September 2023, which then decreased slightly.
  4. Negotiated Deposit Rate:
    • Averaged around 9.33% in April 2024, starting from 9.46% in April 2023.
    • This rate saw some fluctuations but remained relatively stable, peaking at 9.59% in March 2024.

Interest Spread

  • The spread between short-term interest rates (up to 1 year) decreased from 8.84 percentage points in April 2023 to 7.72 percentage points in April 2024.
  • This narrowing spread indicates a reduction in the cost of borrowing and a decrease in credit risk within the market.

Monthly Interest Rate

PercentApr-23Jun-23Sep-23Dec-23Jan-24Feb-24Mar-24Apr-24
Savings Deposit Rate1.601.661.692.602.692.542.702.79
Overall Lending Rate15.9116.0215.5315.4415.3915.4415.5115.42
Short-term Lending Rate (Up to 1 year)16.5517.1016.0715.9415.8216.1016.1715.93
Negotiated Lending Rate13.6513.1113.3713.3813.4413.4013.4613.95
Overall Time Deposit Rate6.797.086.857.457.407.397.557.44
12-months Deposit Rate7.708.688.988.929.159.068.948.21
Negotiated Deposit Rate9.468.829.299.199.569.529.599.33
Short-term Interest Spread8.848.427.097.026.687.047.237.72

The trend in the interest rates indicates a gradual easing of lending rates and an increase in deposit rates, which has led to a narrower spread between the two. This is a positive sign for the economy, suggesting improved market confidence and lower borrowing costs.

Economic Implications

  1. Easing of Lending Rates:
    • The slight decrease in overall lending rates from 15.91% to 15.42% suggests that borrowing has become marginally cheaper over the year. This can stimulate economic activity as businesses and individuals find it more affordable to take out loans for investment and consumption.
  2. Stable Negotiated Lending Rates:
    • The relatively stable negotiated lending rates around 14% indicate that banks' willingness to offer customized loan terms to certain borrowers has not changed significantly. This stability might reflect a consistent credit risk assessment and demand for loans among borrowers who negotiate terms.
  3. Increase in Deposit Rates:
    • The rise in deposit rates, particularly the overall time deposit rate from 6.79% to 7.44% and the 12-month deposit rate from 7.70% to 8.21%, suggests that banks are competing more aggressively to attract deposits. Higher deposit rates can encourage savings, which can then be used by banks to fund more loans.
  4. Narrowing Interest Spread:
    • The narrowing of the short-term interest spread from 8.84 percentage points to 7.72 percentage points indicates a reduction in the difference between what banks charge for loans and what they pay on deposits. This can signify several things:
      • Reduced Credit Risk: As the spread narrows, it may indicate that the perceived risk of lending has decreased, allowing banks to charge lower premiums on loans.
      • Competitive Market: Increased competition among banks could be driving both loan and deposit rates closer together, benefiting consumers with lower loan costs and higher returns on savings.
      • Economic Stability: A narrowing spread often reflects a more stable economic environment where the risk of defaults is lower.
  5. Fluctuations in Rates:
    • The data show fluctuations in both lending and deposit rates over the months. These fluctuations can be influenced by various factors such as monetary policy changes, inflation expectations, and shifts in supply and demand for loans and deposits.

Interpretation for Different Stakeholders

  1. For Borrowers:
    • The decrease in lending rates means lower borrowing costs, making it more attractive for businesses to invest in expansion and for consumers to finance large purchases.
  2. For Savers:
    • Higher deposit rates, especially for time deposits, provide better returns on savings. This can incentivize saving over spending, potentially affecting consumer spending patterns.
  3. For Banks:
    • The narrowing spread can squeeze profit margins, pushing banks to find efficiencies or new revenue sources. However, the stable and improving rates also suggest a healthier loan portfolio with lower default risks.
  4. For Policymakers:
    • The overall trends might reflect the effectiveness of monetary policies aimed at stimulating economic growth while maintaining financial stability. Policymakers can use this data to adjust interest rates, reserve requirements, and other tools to maintain or improve economic conditions.
  5. For Investors:
    • Understanding the trends in interest rates can help investors make informed decisions about where to allocate their resources, whether in banking stocks, bonds, or other financial instruments sensitive to interest rate changes.

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